LONDON - DOLLAR lending rates between banks rose for the third day running Monday after last week's turnabout by US Treasury Secretary Hank Paulson on the US$700 billion (S$1.07 billion) US financial rescue program fostered renewed uncertainty in credit markets.

The rate on three-month loans in dollars - known as the London Interbank Offered Rate, or Libor - rose slightly to 2.239 per cent from 2.236 per cent on Friday. Last Wednesday, following 23 consecutive declines, the rate had fallen to a low of 2.133 per cent.

Analysts said Mr Paulson's decision last week to reset the priorities of the US$700 billion troubled asset relief program (TARP) from buying devalued mortgage-backed securities to reviving consumer credit markets had not gone down well in credit markets as it signaled confusion at an important time.

'The changing of the TARP obviously didn't help,' said Mr Marc Ostwald, chief strategist at Monument Securities in London.

Before Mr Paulson's announcement, three-month dollar lending rates had been falling steadily as lower interest rates and government efforts to shore up confidence in the banking system filtered through.

Lending rates continue to fall however in Europe.

The rate for three-month loans in euros - known as the European Interbank Offered Rate, or Euribor - fell around 0.035 percentage points to 4.18750 per cent, its lowest level since July 2007, just before the credit crisis broke. And the rate in British pounds declined around nearly 0.03 percentage points to 4.14875 per cent, its lowest level since Feb 2004.

While the recent improvements in the credit conditions are significant, the rates remain markedly above their benchmarks set by central banks - 1 per cent in the US, 3.25 per cent in the 15-nation euro zone and 3.00 per cent in Britain. The spreads are still nearly twice as large as they were in mid-Sept, when Lehman Brothers went bankrupt.

Before the credit crunch, widely thought to have begun in Aug 2007, the spread between bank lending rates and official base rates was only around 0.5 percentage points.

Interbank rates are important because they affect the cost of loans in the wider economy, for both businesses and individuals.

They skyrocketed in recent months as banks worried that other lenders might collapse.

After massive intervention from governments and central banks - which included trillions of dollars in bank debt guarantees, pledges to rescue ailing banks, liquidity injections by central banks and interest rate reductions - rates have eased as worry has faded somewhat. -- AP